China Approves Short Selling, Margin Lending to Develop Market
By Zhao Yidi and Zhang Shidong
Sept. 26 (Bloomberg) -- China's cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia's second-largest market after prices and trading volumes slumped, an official familiar with the plan said.
The State Council signed off on a China Securities Regulatory Commission plan submitted this month to allow margin lending and short selling, said the official, who declined to be identified as he isn't authorized to speak on the issue.
China's action contrasts with regulators in the U.S., Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. China's government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.
``It's quite positive for the market and will help attract fresh capital into equities,'' said Wu Kan, a fund manager in Shanghai at Dazhong Insurance Co., which oversees the equivalent of $285 million. ``Given the current level the index is standing at now, I do think some investors will buy low through margin trading so as not to miss the boat.''
The Chinese government carefully timed the move to limit the impact on the market's stability, said the official.
China has scrapped the tax on stock purchases and relaxed company buyback rules to help support the world's second-worst performing stock market this year.
Higher Returns
China Investment Corp., the nation's $200 billion sovereign wealth fund, bought shares in Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp., the nation's three largest state-owned banks, in the past week, after a 58 percent slide in the CSI 300 this year. The index is headed for its first weekly gain in nine weeks.
Shang Fulin, chairman of the Beijing-based securities regulator, is trying to introduce more financial tools to allow investors to earn higher returns and hedge against investment risks at a time of turmoil in global financial markets.
The U.S. government plans to use $700 billion to buy troubled assets from financial firms after $524 billion of losses worldwide from subprime that led to the collapse of Lehman Brothers Holdings Inc., the rescue of American International Group Inc. by the U.S. government, and the sale of Merrill Lynch & Co. to Bank of America Corp.
Trading Accounts
Investors can borrow money to buy stocks in margin trading if they expect share prices will rise. In short selling, investors sell stocks borrowed from brokerages on expectations they will decline and they can buy them back for a profit.
Shares worth an average 118 billion yuan ($17 billion) changed hands every day on the Shanghai and Shenzhen stock markets this year, 38 percent less than the 191 billion yuan in 2007, according to Bloomberg data.
``It will attract inflow of some capital into the stock market, but won't help reverse the market trend unless expectations about corporate earnings growth improve,'' said Wu Youhui, a strategist at GF Securities Co. in Guangzhou. ``Brokerages will benefit most as they'll have a new source of income.''
About 8.7 million new trading accounts have been opened in China this year, compared with 38 million last year, bringing the total to 101.5 million, according to statistics from China Securities Depository & Clearing Corp.
Brokerages
It will take several days for the paperwork to go through, and the plan will be announced either before the week-long National Day holiday next week or right after it, said the official.
Pushing out margin trading and short selling is China's securities regulator's key task this year, as set out at the 2008 annual working meeting, said another official familiar with the CSRC's work.
China published rules in 2006 allowing individuals and institutional investors to make margin trades and short sell an unlimited amount of stocks, however a proposal wasn't submitted to the State Council until this month.
According to the rules, only selected brokerages are allowed to handle margin trades as part of a pilot program. They must have three years trading history and net assets of no less than 1.2 billion yuan for the past six months.
The regulator stated that only companies with market values greater than 800 million yuan and with stable share prices are eligible to be sold short.
China clamped down on unauthorized margin trading in 1997 and 2001, when banks were found to have illegally channeled money into the stock market.
The CSI 300 has tumbled this year on concern that the central bank's efforts to tame inflation, which reached a 12- year high in February, and weakening economic growth will hurt earnings. China's economy grew 10.1 percent in the three months through June, slowing for a fourth quarter.
The index rose more than sevenfold between July 2005 and October to become the world's most expensive market relative to earnings.
To contact the reporter on this story: Zhao Yidi in Beijing at at [email protected]; Zhang Shidong in Shanghai at [email protected]
Last Updated: September 25, 2008 21:15 EDT
By Zhao Yidi and Zhang Shidong
Sept. 26 (Bloomberg) -- China's cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia's second-largest market after prices and trading volumes slumped, an official familiar with the plan said.
The State Council signed off on a China Securities Regulatory Commission plan submitted this month to allow margin lending and short selling, said the official, who declined to be identified as he isn't authorized to speak on the issue.
China's action contrasts with regulators in the U.S., Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. China's government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.
``It's quite positive for the market and will help attract fresh capital into equities,'' said Wu Kan, a fund manager in Shanghai at Dazhong Insurance Co., which oversees the equivalent of $285 million. ``Given the current level the index is standing at now, I do think some investors will buy low through margin trading so as not to miss the boat.''
The Chinese government carefully timed the move to limit the impact on the market's stability, said the official.
China has scrapped the tax on stock purchases and relaxed company buyback rules to help support the world's second-worst performing stock market this year.
Higher Returns
China Investment Corp., the nation's $200 billion sovereign wealth fund, bought shares in Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp., the nation's three largest state-owned banks, in the past week, after a 58 percent slide in the CSI 300 this year. The index is headed for its first weekly gain in nine weeks.
Shang Fulin, chairman of the Beijing-based securities regulator, is trying to introduce more financial tools to allow investors to earn higher returns and hedge against investment risks at a time of turmoil in global financial markets.
The U.S. government plans to use $700 billion to buy troubled assets from financial firms after $524 billion of losses worldwide from subprime that led to the collapse of Lehman Brothers Holdings Inc., the rescue of American International Group Inc. by the U.S. government, and the sale of Merrill Lynch & Co. to Bank of America Corp.
Trading Accounts
Investors can borrow money to buy stocks in margin trading if they expect share prices will rise. In short selling, investors sell stocks borrowed from brokerages on expectations they will decline and they can buy them back for a profit.
Shares worth an average 118 billion yuan ($17 billion) changed hands every day on the Shanghai and Shenzhen stock markets this year, 38 percent less than the 191 billion yuan in 2007, according to Bloomberg data.
``It will attract inflow of some capital into the stock market, but won't help reverse the market trend unless expectations about corporate earnings growth improve,'' said Wu Youhui, a strategist at GF Securities Co. in Guangzhou. ``Brokerages will benefit most as they'll have a new source of income.''
About 8.7 million new trading accounts have been opened in China this year, compared with 38 million last year, bringing the total to 101.5 million, according to statistics from China Securities Depository & Clearing Corp.
Brokerages
It will take several days for the paperwork to go through, and the plan will be announced either before the week-long National Day holiday next week or right after it, said the official.
Pushing out margin trading and short selling is China's securities regulator's key task this year, as set out at the 2008 annual working meeting, said another official familiar with the CSRC's work.
China published rules in 2006 allowing individuals and institutional investors to make margin trades and short sell an unlimited amount of stocks, however a proposal wasn't submitted to the State Council until this month.
According to the rules, only selected brokerages are allowed to handle margin trades as part of a pilot program. They must have three years trading history and net assets of no less than 1.2 billion yuan for the past six months.
The regulator stated that only companies with market values greater than 800 million yuan and with stable share prices are eligible to be sold short.
China clamped down on unauthorized margin trading in 1997 and 2001, when banks were found to have illegally channeled money into the stock market.
The CSI 300 has tumbled this year on concern that the central bank's efforts to tame inflation, which reached a 12- year high in February, and weakening economic growth will hurt earnings. China's economy grew 10.1 percent in the three months through June, slowing for a fourth quarter.
The index rose more than sevenfold between July 2005 and October to become the world's most expensive market relative to earnings.
To contact the reporter on this story: Zhao Yidi in Beijing at at [email protected]; Zhang Shidong in Shanghai at [email protected]
Last Updated: September 25, 2008 21:15 EDT
